The project examines demand inducement in the private and the Medicare markets. Beginning 1992, Medicare reimbursement for physician services will change from the customary, Prevailing, and Allowed system to the New Medicare Fee Schedule (MFS). Under the MFS, physician payment rates for most physician services will be reduced. A major concern is that physicians suffering income losses will induce demand to recoup part of the losses. If that is the case, then the intended goal of the MFS for cost control will be undermined. Past literature on demand inducement has not reached any conclusion as to whether physicians indeed induce demand. More importantly, no research has been done on the spillover effect of Medicare reimbursement changes in the private market. Given that the U.S. has a multi-payer health care markets, physicians can substitute private for Medicare patients in response to Medicare fee cuts. Any analysis focusing on only one sector of the economy will therefore run into the danger of making misleading conclusions on the efficacy of a fee policy. Understanding the spillover effect also has important implications on an all payer system and employer provided benefits. Significant spillover effect means that controlling public program costs does not necessarily control total health care cost. It may also lead to increase in private insurance premium such that employers are less willing to provide health insurance. to date, there exists no data to test for the spillover effect. This Study will assemble a dataset which links the private and the Medicare sectors at physician level, and which links physician characteristics and patients characteristics using hospital discharge files from New York, Maryland, and Washington. Using the OBRA 1987 as the natural experiment, this project will address the following questions: 1. what is the direction and magnitude of change in quantity of overpriced procedures supplied to private and Medicare patients? 2. what is the direction and magnitude of change in quantity of non-overpriced procedures supplied in the private and Medicare markets.